CalPERS, the nation's largest public pension fund, will also invest up to $1 billion in a series of funds managed by Weisel Partners that will make venture capital and other private equity investments in fast-growing companies.

The two sides said they hoped to build a broad relationship that would, among other things, increase the flow of capital to California businesses. Weisel Partners, one of the only independent investment banks based in San Francisco, raises capital and provides merger advice to companies in expanding industries such as the Internet and telecommunications.

"This is a strategic, long-term partnership that will take multiple forms," said Thomas Weisel, the firm's chief executive and founder.

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CalPERS' stake values the closely held Weisel firm at $1 billion. That's twice its initial worth and close to the $1.3 billion NationsBank paid Weisel in 1997 for his previous venture, Montgomery Securities, which had a three-decade history.

Large private investments by pension funds are not unprecedented. While CalPERS puts most of its $165 billion of assets into conventional stocks and bonds, it also has formed joint ventures with such companies as cable operator Comcast Corp. and energy provider Enron Corp.

What's unusual about CalPERS' relationship with Weisel is its size and scope. The pension fund is taking a large equity stake in the firm and putting $500 million to $1 billion into five yet-to-be-created private equity funds that will channel capital to promising young companies in the United States and Europe. Private equity funds buy stock in companies, but the stock can be difficult to sell since it doesn't trade in public markets.

"What a jump start," commented Dean Eberling, an analyst with the brokerage firm Putnam, Lovell, de Guardiola & Thornton. "It puts permanent capital in the firm and helps it to grow regardless of market conditions."

CalPERS officials said they originally approached Weisel Partners about putting money into one of the firm's existing private equity funds.

But at a meeting last summer, the CalPERS contingent was so impressed by Thomas Weisel they decided to ask for an equity stake as well. "I was just blown away by the quality of the organization he had built," said Barry Gonder, CalPERS senior officer for alternative investments.

Still, CalPERS is hedging its bets. It has an option to sell its stake back to Weisel under some circumstances if the firm stumbles. And the second $500 million round of investments in Weisel's funds hinges on the firm's ability to meet performance goals.